When U.S. authorities faced financial panic in 2008, their first response was to pump liquidity into the system. It was access to credit, not the quality of credit, that was the issue, they thought.
It turned out they were wrong. U.S. banks were facing a full-fledged solvency crisis. They owned assets that weren’t worth the paper their financial statements were printed on. Congress appropriated $700 billion to recapitalize the banks.
Fast forward 19 months and travel east across the Atlantic where Europe’s leaders confronted a home-grown sovereign debt crisis, a rout in financial markets and a loss of confidence in the euro. Their solution? Lend more money to already indebted countries.
Europe’s leaders must have been snoozing in the back row when the teacher conducted the TARP review class. (TARP stands for Troubled Asset Relief Program.) You can’t recapitalize a sovereign nation by issuing more debt. In the same way that more lending couldn’t enhance U.S. banks’ capital adequacy, “extending more credit to (European) nations that can’t service their accumulated debt won’t make them more creditworthy,” says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York.
[blockquote]You can’t recapitalize a sovereign nation by issuing more debt. In the same way that more lending couldn’t enhance U.S. banks’ capital adequacy, “extending more credit to (European) nations that can’t service their accumulated debt won’t make them more creditworthy,†says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York.[/blockquote] Masters of understatement! It will make them [b]less[/b] creditworthy. It is just as stupid as government propping up the price of goods for which the demand has fallen below the level required to “clear the market.” When you are faced with that kind of loss (by holding assets that are worth less than they cost to produce—in the case of debt this would be owing more than you can service from available income), it is time to “take the loss.” Attempts to avoid doing so simply “kick the can down the road” and significantly increase the probability that the situation will worsen.
As one teacher of economics put it, the bailout of the Greek debt by the ECB has “opened the floodgates to European inflation.” But [i]progressives[/i], captives of their own [i]progressive fallacy[/i], know so much more than their forerunners, the result of which is they almost inevitably return to the same non-solutions.
Pax et bonum,
Keith Töpfer